Tagged: FMP

TNN | Apr 7, 2015, 06.55AM IST | Times of India
It’s the start of the financial year 2015-16. This is also the time when every investor should put in place a plan for investing and saving on taxes using all the options that the government has given to them. However, according to financial planners and advisors, while putting in place a long-term financial plan, the main aim should not be tax savings. The main aim should be to build the required corpus for the goal for which you are investing. Here are some tricks that will help you build wealth in the long run without much thought…

Use your bonus wisely

This is the time lot of people get a bonus. According to top of ficials at mutual fund houses and financial advisors, rather than spending on things that may not be an absolute necessity, you can invest the whole or a major part of the bonus in an equity mutual fund. Let us assume that you get a bonus of Rs 3 lakh this year and you put the whole amount in an equity mutual fund.

Now let us also assume that every year your bonus increases by 10% while the equity fund you are investing in, over a 10 year period, gives you a return of 12% per annum.At the start of the second year, your bonus is Rs 3.3 lakh and at the start of the third year it is at about Rs 3.6 lakh. At this rate, at the start of the 10th year, your yearly bonus will be about Rs 5.7 lakh. But if you have invested your yearly bonus every year in the equity fund that gave an annual return of 12%, your total corpus at the end of the 10th year will be a little over Rs 80 lakh. This looks like a staggering amount, but there is no magic in it.

Make good use of ELSS

According to financial planners and advisers, equity-linked savings plans (ELSS) floated by mutual fund houses are one of the best tax saving options for investors. This is because in the long term they have the potential to generate an average annual return of 12%, saves on taxes under section 80C of Income Tax Act and has a lock-in of just three years.

The returns from all ELSS are also tax free while the costs are around 2.5% per annum, one of the lowest for similar products. In comparison, most of the other tax-saving options cannot generate as high a return, costs are higher and returns are taxed on redemption. A combination of some of these factors makes such products unattractive in comparison to ELSS. So suppose after taking care of your contributions to provident fund, home loans, etc, you are still left with about Rs 60,000 to invest to save taxes under section 80C, go for one or more SIPs aggregating Rs 5,000 per month so that your yearly contribution is Rs 60,000.At about 12% average annual return, in 10 years, this can grow to be a Rs 11.6 lakh corpus.

Use excess cash intelligently

If you keep your excess cash that you need at a short notice, you probably keep it in your savings bank account. However, a better alternative is to keep it in a liquid fund of a good mutual fund house. Compared to 4-6% annual return that you can get in your savings bank account, liquid funds on an average has given a return of over 7.5% in the last five years while some of the best liquid schemes have returned over 8.6%. This higher return comes at a slightly higher risk and slightly less liquidity , that is about 24 hours, compared to money at call in case of savings bank accounts. So, if you can manage your cash inflows and outflows well, you can put your extra money in liquid schemes and earn much higher returns. There’s alternative to FDs Fixed maturity plans (FMPs) are a good alternative to fixed deposits (FDs). If you are keeping your money in FDs for three years or more, FMPs of similar maturities can give you a much better return as FMPs enjoy long-term capital gains tax advantages if the money is kept for more than three years. FDs do not enjoy similar benefits.

PTI | Jan 30, 2015, 12.34 PM IST | Times of India
MUMBAI: Life insurance has emerged as the most preferred investment option for Indian households with an income up to Rs 25 lakh, says a survey.

Seventy per cent of affluent population of the country, who hold investments other than cash, have put their money in life insurance, while 64 per cent among them have gone for fixed deposits, according to the DSP BlackRock India Investor Pulse Survey.

It is followed by their investments in other financial instruments like shares (46 per cent), equity mutual funds (33 per cent), fixed maturity plans (27 per cent), tax-free bonds (25 per cent) and so on, it said.

“Even though the larger current ownership is in insurance and fixed deposits, there is a growing awareness among the educated affluent category of investors in the country to move more money from cash and deposits to other form of investments like mutual fund and bond,” said DSP BlackRock Executive Vice President, Head (Sales) and Co-Head (Marketing), Ajit Menon, while unveiling the survey report here today.

People living in the country invest 25 per cent of their monthly take home pay, which is higher than the global average of 17 per cent, it said.

When it comes specifically to asset allocation, Indians are more likely to invest in property than the global average, it added.

Equities and bonds are also important asset classes accounting for 13 per cent and five per cent of the total value of saving and investment products, the survey said.

Majority of Indians (56 per cent) feel their economy is getting better, way ahead of the global average of 22 per cent. The huge margin of positivity extends to their financial future with 81 per cent of Indian respondents feeling positive as compared to 56 per cent globally, it added.

A large proportion of Indian respondents also feel that they are in control of their finances (75 per cent) as compared to the global average of 55 per cent, second only to China (84 per cent).

By: K Naresh Kumar | January 11,2015, 12.41 AM IST | THE HANS INDIA
Here goes the saying that many people look forward to the New Year for a new start on old habits. On each New Year, most people embark on a list of resolutions but by the end of the year, a very few manage to achieve the desired results. So, let us look at the 15 investing/saving ideas for the year 2015.

Prepare/revisit goals: Dream and draw up a plan to reach them. Like they say it all starts with the single small step, so break it down to a financial goal and seek ways to reach it.

Have a budget: This is something many people struggle at, including our Govt. To remain organized, identify and define your expenses as discretionary and non-discretionary, Create caps and ensure you stick to it. Use any of the available online organizers or budget planners to keep tabs.

Cut costs: Cutting costs doesn’t mean cutting back, one needn’t change the lifestyle to reduce expenses rather change how much your lifestyle costs. For instance, go for an online purchase and only after a comparison of an essential.

Ditch the savings account: Savings account can’t even match the current lower inflation. Once the budget’s in place, route the rest of the amounts to a liquid/liquid plus funds. The results will sure be pleasantly surprising.

Invest in Equity: India story is intact and the worst is behind. Add this asset class according to their risk appetite, though this year could witness quiet an amount of volatility. Stick to a SIP for better cost averaging.

Expose to Fixed Income: The possibility of interest rates going down is higher than ever this year. Lock-in on higher interest rates with better tax efficiency like the FMP, long term debt funds than a FD.

Bond with Bonds: Explore bonds including tax-free variant. The falling interest rates would appreciate the bond prices while one continues to enjoy the accruals (interest). Try to time the investment before the yields harden.

Exploit the taxation: Max out on the tax shielding instruments that could cut your tax liability. But please ensure these decisions are in line with ones goals.

Create a portfolio: Asset diversification is a must and create a portfolio that has the least possible correlation. This way one could reduce the risk and also end up positive in most market conditions.

Do charity: Be it Karma or otherwise, one gets what one gives. Spare a bit to charity and also claim tax benefits u/s 80(G)

Play hard ball: The businesses are slowly looking up, so bargain for its true worth.

Go for a Gold cover: With so much uncertainty and strife in the world economies, gold could add a bit of sheen, at least from last year’s perspective but limit to less than 10% of the portfolio.

Dabble with Oil: Try playing in commodities this year and Oil, though going through a bloodbath might rise up as all the falling is only to build up.

Dump the DIY in investing: Take help of an expert for advice and execution. Make sure he acts as a guide and understands your needs and requirement.

Leap of faith: There is an information overflow across media now-a-days. Make a habit to acknowledge ones instinct aka gut while making important decisions. No amount of fundamental, technical and exogenous cues could replace. Pick all or some of these ideas to realize your dreams.

TNN | Oct 20, 2014, 07.08AM IST
You are a diligent saver, a careful investor and a meticulous planner. Yet, you have not been able to build wealth even as everyone around you seems to be wallowing in money. What’s stopping you from getting rich? If you really want to get to the root of the problem, you need to assess where you are going wrong in your investments. It could be the lure of penny stocks or the tantalising potential of the futures and options segment. Small investors often lose their shirts (and nearly everything else) when they enter these high-risk arenas.

But mistakes can happen even if you play ultra safe. If a fixed deposit offers 9%, the posttax returns for someone in the 30% tax bracket will be barely 6.3%. That’s not too bad until you factor in 8% inflation. So even though the investor does not feel it, his money is losing value. here are a few common hurdles that prevent investors from getting rich.

Trapped by value and price in stocks

Buy low and sell high is the ultimate winning strategy in the stock market. But some investors take this literally and buy very low-priced stocks. Since the market cap is low, these penny stocks are easily manipulated by operators who lure unsuspecting investors and dump worthless shares on them. They first create a buzz around a stock, indulge in circular trading to push up the price, and then nudge investors to buy at high prices. A penny stock is never a good investment, because you are buying it only in the hope of ‘finding a bigger fool’ who will buy it at a higher price. If a share is priced low, it is because the market does not see value. Study the fundamentals of the company. That will give you enough reasons to avoid the junk shares.

Buying overvalued stocks

One can go wrong even with the blue chips. Small investors often get carried away by the market euphoria ignoring the ‘value’ of the stock. A good stock at a very high price is not a good investment. This overvaluation can happen even at the broader market levels. We studied the Sensex PE and its returns over the past 20 years and found that when the market was overvalued, the one-year average returns were very poor (see graphic). Pay attention to valuation when you buy a stock. Even if the company is growing very fast, avoid investing in it if the stock—or the market—is overvalued.

Falling into value traps

Buying a stock just because the price has fallen 50% from its peak is not always a good proposition. You may end up in a value trap. Investors who go hunting for bargains in the initial phase of a bear market also get into the value trap. They compare the current price and PE multiples with the earlier peak and start buying because the stock is available ‘at a discount’.

However, the price may continue to fall and losses could mount. Most all-time peaks are scaled during extreme euphoria in the market and, therefore, do not represent the real value of that stock. Similarly, it is not fair to judge the current valuation of a stock by comparing it with its all-time high valuations. Instead, compare the current valuation with average valuations for the past 5-10 years.

Buying risky futures & options

Be greedy when they are fearful is what stock gurus advise. But some investors are greedier than they can afford to be. They get into the high-risk arena of futures and options (F&O) even though they don’t have the financial muscle or the acumen. The F&O segment allows an individual to buy up to five times the margin kept with the brokers. This means that with a margin of Rs 50,000, one can take a position in shares worth Rs 2.5 lakh. But while your gains can be five times greater, so can your losses. Whether it is the F&O market or the cash segment, don’t bite off more than you can chew.

F&Os are meant for hedging and retail investors should get in there only for hedging their existing portfolio. They can get into the speculative part later, but only after learning enough about the F&O market and the risks involved.

Overinvesting in safe options

Most investment portfolios are skewed in favour of debt. Investors want stable returns, even if they are low. But this ‘safety first’ attitude can hamper long-term goals because the returns from debt instruments lag inflation.

Even investors who are careful about their asset allocation can get it wrong. Very few salaried professionals take into account their Provident Fund (PF) when drawing up an asset allocation plan. The 12% of their basic pay that flows into the PF every month and a matching contribution from their employer is actually enough to take care of the debt portion of their portfolio. The rest of their investible surplus can flow into equities and other lucrative investment classes.

Not exploring other options

Bank deposits and Post Office schemes are the favourite investment options when it comes to debt. But these are not very tax efficient. The entire income from fixed deposits is taxable at the normal rate. For a person in the 30% tax bracket, the post-tax returns from a fixed deposit that offers 9% is actually 6.3%. Given the prevailing inflation rate, the investor is actually losing money. Factor in the post-tax yield when evaluating an instrument. Go for tax-free options like PPF or tax-free bonds. For salaried taxpayers, the Voluntary Provident Fund is a tax-free haven with no limits on investment.

Though the recent budget has reduced the tax advantage for debt mutual funds, FMPs still score better than FDs if the tenure is more than three years.

Choose consistency over great returns

Investing in the stock markets can be tricky. Even when you invest through a mutual fund, the timing of your entry into the market has a huge bearing on the return. Suppose you receive Rs 2 lakh as bonus from your employer, the stock markets are on an upswing, and you decide to park the entire sum in a high-performance equity fund. Subsequently, some bad news emerges that brings down the market by 40% over just a few weeks. Your fund also takes a hit, leaving you poorer by Rs 80,000. Here, the choice of fund was not at fault, nor was your decision to invest in the stock market. You should stagger your investment over a period of time. This way, you take a hit only on the initial investments. As the market begins to revive, you can invest the remaining sum. This will yield a healthy return on the overall investment once the market regains its previous level. SIPs, therefore, are a better option than a lump-sum investment.

Ignoring fund expenses

People may drive a hard bargain when buying fruits and vegetables but ignore the expense ratios of their mutual fund investments. The expense ratio of equity funds typically ranges between 2.5% and 3%. Over the long term, even a small difference in cost can make a considerable difference to your returns (see graphic). Check the fund expenses before you invest. There are enough good quality funds with low expense ratios. Another option is to buy direct plans that charge a lower expense ratio.

Life cover is not an investment

Chosen well, a life insurance policy can protect the financial future of the entire family. But, if bought for the wrong reasons, the same policy can become a drain on resources and prevent the policyholder from meeting crucial financial goals. These wrong reasons include tax savings under Section 80C, investment for retirement and gifts for children. Traditional plans are the biggest culprits, combining low life cover with poor returns. The life cover offered is 10-20 times the annual premium while the returns are at best 6-7% (see graphic). Yet, life insurance is a favoured investment option because investors see triple benefits: tax savings, long-term savings and life insurance. Since the premiums of endowment policies and money-back plans are very high, buyers are not able to take a very high cover. For instance, a life cover of Rs 1 crore for 30 years would cost a 30-year-old roughly Rs 20,000 a month if he buys a traditional insurance plan. But, if he buys a term plan, the same cover would cost him about Rs 1,000 a month. Traditional insurance plans suit ultra-highnet worth investors who are looking for tax-free income under Section 10(10d). Small investors should not combine insurance and investment.

Instead, a combination of a term plan and Public Provident Fund works better than an insurance policy. If you have a higher risk appetite, you could invest the savings on the premium in mutual funds which have the potential to give higher returns—though they carry some level of risk.